Tuesday, December 28, 2010

In the most recent discussion on CATO Unbound, Daniel Klien attempts to address the issue of property rights in a social democracy. While Daniel Klien’s essay is interesting, I felt that it is more important to address one of the topics that one of the response essays addressed. In response to Klien’s article, Matthais Matthijs wrote an essay titled “In Defense of Reason and a More Balanced Free Society.” While there are a lot of topics I would like to address in his essay, the one I would like to address now is the issue of positive versus negative liberty. In his essay he talks about unequal opportunities and how these lead some people to have less “freedom” than others, but what it basically breaks down into is the issue of positive and negative liberty. Before proceeding, I think that it is important to address the question of that are positive and negative liberty. While some people would claim that there is no difference between the two, I would disagree. For example, a negative liberty entails restrictions on what other people can limit you to do. For example, a negative liberty would be our concept of freedom of speech and religion. While a positive liberty, defined by Matthijs, would include someone providing you with a resource that expands your consumptions possibilities. Examples of these would be the right to healthcare, or the right of someone providing you with a church to practice your freedom of religion. Let me also say this, I would agree with Matthijs that our resource constrains, whether they are financial, biological or something else, do limit what we can do. For example, right now I could not purchase a Porsche for me to drive. This means that I lack the positive liberty to own a Porsche. However, with no one physically preventing me from purchasing a Porsche, or preventing me from saving money to purchase the car, I have the negative liberty to own a Porsche. However, I would disagree with him that this means that I am less free, or that something should be done to change this fact. I think the best way to frame my objections to the notions of positive liberty would be to provide an example. So let me ask a question, am I free to quit my job? Right now, I could not quit my job and remain unemployed for any significant length of time. From a positive liberty point of view, I am not free to quit my job. However, there is no law, or other external restraint, preventing me from quitting my job, which means that I have a negative liberty to quit my job. From Matthijs’ point of view then, I am not genuinely free. To be genuinely free, I would need to have someone (who?) provide me with all the housing, food, clothing, heat and healthcare that I could want for as long as I want. But why stop at those items? In order to truly be free, I would also need all the internet I want, a two week vacation to anywhere in the world, and anything else I could want. I mean hey, the thought of being a professional video game player sounds like a job I would like. In order to be genuinely free, someone would have to provide for me everything I would need in order to pursue that goal, like a really good computer to handle the latest video games, etc. In addition to the problems of determining all the physical items that would be needed for someone to genuinely free, we run into several other problems. First, if I have a right to healthcare, and a doctor has a right to quit his job, what happens when my rights and the doctors rights conflict? In fact, what about the provision of all the other goods I have a right to in order to be genuinely free. Those items don’t just appear out of nowhere. Some on has to provide them. In the sense that I have a right to the good that these people produce, I have a right to tell them what to do. There is a word for the process I just described, it is called slavery. Ultimately, it seems to me that if you follow the actual line of reasoning of what the notion of positive liberties entail and look beyond what is obscured by the notion of taxation and money, you come to a situation where we all become slaves to each other, the very Orwellian concept that freedom is slavery. Secondly, I would also point out that Matthijs points out the fact that we are all born unequal, however he only talks about the one area where we are born unequal that he feels is important, income wealth. However, this forgets that there are other areas where people are born unequal as well. For example, some people are more attractive than others. In addition, some people are tall while others are short, some people have blonde hair while others have brown, some people have beautiful singing voices while others do not, and I can keep going on like this for a very long time. If the fact that some people have more monetary wealth than others, and equalizing this inequality makes people freer, than equalizing the other areas of inequality should have the same result. However, I seriously doubt that most proponents of positive liberty would support laws that require everyone to die their hair black, or require taller people to go through surgery to have the length of the legs shortened. After all, how is it fair for taller people to have an advantage in basketball, they only got that advantage because they were lucky and had parents that provided them will a genetic code that leads to long legs. In addition, let me talk about another example that I was thinking about today. Under our current higher educational system, people have to pay to receive their education. I recently was reading about a woman who graduated from a private university with over $200,000 in debt and ended up with a fairly useless degree (I don’t remember what it was). Because of this debt, she cannot do some of the things she would like to do. She cannot take a low paying job that provides other non-monetary rewards. In addition, it makes it so she cannot live on her own, or she cannot take another trip to Europe. Because of these loans, Matthijs would say that her positive liberty is severely restricted. While I would point out that she took those loans voluntarily, I would agree that those loans do limit what actions she can now take. So let us suppose that upon hearing this, our country decides to provide post-secondary education for free. This way no one will come out of school with loans, and people’s positive liberty will increase. However, this is a similar problem to Bastiat’s broken window and fails to look at the unseen responses of such actions. For, the post-secondary schooling will not be free; the government will still have to pay for it somehow. It is most likely to do this through taxes. Let us suppose that it is done through a value added tax (what type of tax really does not matter). Now I, and everyone else, will have less money to spend on the goods and services we would like to purchase, because of the higher tax. Now, everyone that is taxed has had their positive liberty reduced. With the tax, I may now be unable to take a trip to Europe, or someone else may be unable to get a lower paying job that provides other non-monetary rewards. So has the total amount of positive liberty in society been increased? When we look at it, some people gained positive liberty, no student loans and more access to higher education, while others have less, lower disposable incomes. I would say that I think Matthijs would have several counter arguments to this example. He may ask what if the tax for paying for free higher education was placed on “the rich?” Then the positive liberty of the “rich” are not reduced, or if they are it is by only a small amount, because what value does more income provide to the “rich?” So the positive liberty of society may increase significantly on net it the correct taxes are placed. However, I would argue that this line of reasoning is merely another fallacy that forgets to ask, what would that money have been spent on otherwise? Sure the rich may not get much value from that money, but they are not the ones likely to spend it. Most of the money was likely kept in investments, stocks, bonds, bank deposits. This means that most of the money would have been spent on lending to businesses to expand, or open. Perhaps the money was donated? The point is that it is unlikely that placing the tax burden on “the rich” will not change the point that providing some people with positive liberty also means depriving others of some positive liberty as well. While I find the points I made previously to be quite compelling, proponents of positive liberty and the social democratic state would charge that I am wrong in my reasoning. For example, they are likely to point out that most of the developed countries in the world operate on the principal that healthcare is a right and yet they don’t have guns pointed to heads of their healthcare providers. While I would agree that we do not see the results I describe in other countries that state that healthcare is a right, I would argue that the reason we don’t see this is because those countries don’t actually act as if health care is a right. In those countries, people do not receive all the health care available to them that they want; it is rationed through the government. Not a single one of those countries provides any medical procedure to anyone who wants it. If you actually think that healthcare is a right, I don’t see how you could deny that care. In addition, when they do run up against the issue of doctors leaving their jobs and providing care for the sick, those governments tend to uphold the right for a person to quit their job over the right of someone to receive health care. So they do run into the problem I described, the only difference is, instead of prioritizing the right to healthcare over the right to quit a job, they do the reverse. However, this runs into the simple problem that if no one provides the service, no one can consume the service, thus they do not have a right to it. Let me end this by saying a couple of things. I am not saying that the goal of making sure that everyone receives as much health care, heat, food, clothing, etc. that they want is not a desirable goal. I just don’t see how saying that people have a right to them gets us anywhere near that goal. In addition, if we would also agree that negative liberties are also important, then we face the impossible task of providing two separate goals that inherently conflict with each other. I agree with Matthijs that we should be working toward expanding the consumption possibilities frontiers for everyone. However, we should attempt to get there by finding ways of providing more of these goods, not by writing on pieces of paper that everyone has a right to these items and ignoring the actual process of how to provide these goods.

Tuesday, November 23, 2010

Today I was reading one of the blogs on the Economist website. I ran across several articles that I felt like I wanted to comment on. For this post, I will be talking about a post by M.S. that talks about the fast food happy meal toy ban in San Francisco (http://www.economist.com/blogs/democracyinamerica/2010/11/happy_meals_ban). There are several things about this blog post that I think needs to be addressed.

First, M.S. begins the post by acting like the post is designed to address the slippery slope argument and its use with unhealthy food. However, the post only spends a paragraph on the subject, and I will address the slippery slope argument and its relevance to this type of paternalism in a later blog post.

In the beginning of the article M.S. first brings up his thought that paternalism in this case is good, because the people involved are children. The problem is, no one is making the argument that children should not be treated like children. The issue is, who should be engaged in the paternalistic behavior? The parents, government, or a combination of the two.

Second, M.S. spends the second half of the blog post basically making the statement that people should not eat fast food, and the people are being manipulated by fast food companies to get their children to eat fast food. Finally, he ends by saying that it is perfectly reasonable for a demographic government to impose these bans as long as it is working in the interest of the general public and is done with the support of the majority. This is what I found most interesting and is ultimately is crux of his argument for why it is ok for these types of paternalistic laws to exist. However, this is ultimately what bothers me the most. Instead of deciding not to give his children fast food and dealing with the resulting behavior, he feels that he is justified in preventing everyone else from doing the same, as long as a majority of people agree with him.

However, my concern is with the minority. What about the minority of people that want their children to have toys when they go out and eat fast food. This fails to address the question: when is it wrong for the majority to impose its will on the entire population? I would be willing to bet that the justification that he used for the ban on toys would not convince him that it is ok to ban gay marriages, or teach creationism in schools, if that is what the majority of the population supports.

Sunday, September 26, 2010

A while a go Wired magazine had someone post a review of the young-adult book "For the Win" by Cory Doctorow (You can find the book to download for free at: http://craphound.com/ftw/download/). Within the review the Wired author mentioned that the book was about labor rights and unions and that the book had strong economic reasoning for a young adults book. Naturally, this piqued my curiosity. So, I downloaded the book and read it.

For a kids book, I don't think that it was too bad. I thought the characters were pretty flat, the story was a bit repetitive at times and was unnecessarily long. Sadly, I thought his understanding of economic consents was particularly weak. For the most part, the book was filled with the standard critiques of the economic conditions in the third world. Complaints about sweat-shops, child-labor, pollution, exploitation, etc. While some of these things may be bad, as usual, there is very little examination on why they exist, other than to say that they are rich powerful people exploiting poor weak people. I am sorry, but I generally do not think that is really the case.

In addition, I thought that his understanding of arbitrage was particularlly weak. Sure, I think that he explained what arbitrage was fairly well. However, his critique of saying that it does not create any economic value was particularly ignorant. For example, he does not seem to understand that getting goods from one person that values something for $5 to someone that values it at $10 creates economic value. His chapter on arbitrage says that the "neighborly" thing to do would be for a person to work to bring these two people together for free. Under this argument, people should be willing to work at any economic activity for free, because that would be "neighborly". However, his entire book is about people wanting to get paid more, not less.

In one area of the book, he has a child worker that is attempting to create a union in India talking with another worker who says that it is not fair for a boss to be able to fire workers, while workers cannot fire a boss. However, this argument fails, simply because it is incorrect. A worker can very easily fire a boss, it is called quitting your job. Under such an arrangement, that individual that was your boss, no longer has any control over your life. In fact, may of the laws we have today, including union rules, make it harder for a boss to fire their workers, however, we have no laws that prevent a worker from firing their boss by quiting. Just imagine the uproar that would occur if a law was suggested that would prevent people from quiting their job unless there was a justifiable reason, just like the laws that many countries have that require a business to have a justifiable reason to fire a worker.

I think that the reviewer from Wired over sold this book. While I enjoy the video game aspects of the book, the poor economics and poor reasoning of the book is going to prevent me from reading this book again. For the most part, it was entertaining, but not enough for me to want to read it again. Perhaps if I was 15 years younger, or I knew less about economics, I would enjoy it more.

I just finished watching the South Park episode "Butt Out." I particularly enjoy this episode, because it points out a lot of the ridiculous things that are done to prevent people from smoking, and it makes the very good point that people may be aware of the health costs of smoking, but still choose to do so. I would recommend that everyone should watch this episode. However, I would like to talk about one reason that is used by many to justify the banning of smoking in just about any public location, such as bars, parks, restaurants, etc.

Many times, when you hear people attempting to justify the bans of smoking in public spaces, they bring up the argument that second hand smoke creates externalities (many make this argument even though they don't know what externalities are). The reasoning is this: smoking by one person imposes costs on other people, due to increased health risks, bad smells, and other external costs. Because of these external costs, or externalities, many people, including economists, seem to think that smoking bans are justified and will actually improve total welfare. However, I think that this argument fails pretty strongly. Why?

This line of reasoning forgets the observation that if people know about these costs a head of time, and still take the action that involves others placing an external cost onto them, they have internalized the cost and no externalize exists. For example, if a non-smoker enters a bar that they know to allow smoking, they are accepting and internalizing that cost when deciding if they want to enter that bar. Again, no externalities exists.

It may be easier to see this by looking at a different example. Suppose that there is an empty field, with no one living there. Now, a factory is built there and the owners of the factory own the adjacent land out to a one mile radius. In addition, the factory emits pollution that spreads out in an exact 1 mile radius, and no pollution extends beyond this one mile radius. Currently, no externalities exist. The owners of the factory and land bear the entire cost of the pollution. Now, what if the factory owner sells some of the land and a family purchases the land and builds a house within the one mile radius and lives there. Does the factory impose an externality onto the family that lives in that house? As long as the family knew about the pollution before purchasing the land, no there is not. They knew about the cost and they internalized the cost when they decided to move onto the land.

The same line of reasoning that was applied in the factory example can be applied to the smoking example. As long as customers, or employees, know about the smoking before they enter the restaurant, or bar, the smoking does not impose external costs on others. They gave internalized the externality. This may be a strong reason for why a law that requires all businesses to post their policy of smoking near all enterances may be a good idea, but it is not a good reason to ban smoking all together.

Admittedly, this externality example is only one of many reasons people give for why we need to ban smoking in private establishments. However, I find the externality to be the strongest case for why smoking should be banned from a private business. However, as you may notice, I find this argument to be particularly weak.

Sunday, July 25, 2010

There has been a lot of talk recently about the growing income inequality in the United States. Personally, and I could not care less about what others have as long as people are capable of living a decent life. however, for some reason this seems to bother a lot of people. In addition, people like to speculate as to why income inequality has increase so much over the past 30 years. While this is a complicated subject with a lot of contributing factors, it seems to me that we seem to miss the most obvious and, quite likely, the most important factor. Over the past 40 to 30 years the top marginal tax rate has decreased significantly from approximately 90% to 35%. Does it surprise anyone that over the same period the amount of money that the top 1% of people make has increased as the amount that they are taxed decreased? Is this not basic economics? If you tax something, you get less of it and if you tax something less you get more of it.

If all we want is to significantly reduce income inequality, all we would need to do is raise the marginal tax rate to 100% for some given income level, such as 1 million dollars. We could set up a system where the dollar amount does not increase with inflation, or only increases at half the rate, which would slowly lead to converging income levels and reduce income inequality. However, I think that this would have some serious costs. In fact, if you think that this would have any negative effect on economic output and performance, you agree, at least in part, that supply side economics does have some merit.

In a previous post I talked about why I do not find talk about natural resource constraints on economic growth. Put bluntly, I feel that there is absolutely no reason as to why we cannot continue to expand the world economy indefinitely. A lot of times that I bring this up, people attempt to refute this assertion by bringing up the point that the Earth is finite, with a finite amount of resources. I find this argument weak and I think that people that make this argument tend to only examine one portion of the equation that determines economic growth. For example, I have put together a very simple model of how the world works and the relationship of resources to economic growth. Here it is: Yt = N * At * Tt. Where Yt is the economic output of the world economy at time t. N is a constant that represents the amount of natural resources on this planet. At represents the share of the natural resources that we are technologically capable of extracting and can use. Tt is our technological ability to change the natural resources into something else.

People who say that we cannot continue to grow our economy point out that N is constant and once you reach a point where At = 1, Yt will not be able to increase. However, this argument fails, because it does not take into consideration Tt. Why does this matter? Lets look at a couple of examples.

Two thousand years ago it would have been impossible to build a tractor to increase the agricultural output of your land. Even if you had the same amount of iron, copper and other natural resources, you still could not make those resources as productive as a tractor. Even if we held the amount of natural resources constant, transforming them into a tractor would make them significantly more productive and more valuable. Essentially, we have held N and At constant and increased Tt, which has increased Yt.

What about other resources, such as oil. We are currently using oil and turning it into other things, like CO2 through the use of internal combustion engines, which may be causing N to actually decrease over time. However, over time Tt has increased as well. We can now go farther and do more with a gallon of oil than we could have before. Lets say that we have used about half of the oil that is in the Earth. does this mean that we can only do half as much? Of course not. If over this time we doubled the efficiency of our oil use, we have essentially not changed the productive capacity of our resources. Essentially, we have slightly decreased N, but Yt was able to increase, due to Tt increasing as well.

The model presented here is quite basic. If fails to take into consideration that each of the variables may be dependent on each other as well. For example, it is quite possible that by using the resources we are causing Tt to increase at a faster rate than it would have otherwise. If this is the case, the use of resources helps us to develop new ways of conserving the resource as well. The only question to our ability to continue to grow our economy forever would be: can Tt continue to increase? At this point, I only see evidence that Tt is actually increasing faster now than it has in the past, and I don't see any reason why it cannot continue to increase for any significant amount of time.

Friday, June 4, 2010

When the current financial crisis hit, we regularly heard cries from the left that since the era of Ronald Regan we have deregulated our economy and this ultimately led to, or contributed to, the current financial crisis. This mantra expanded even further with the current issues with the Gulf Coast Oil spill. We regularly hear that we attempted to let businesses regulate themselves, and this ultimately failed. However, us classical liberals look at the past 30 years and are befuddled that anyone would call this period an era of a deregulated economy. Without any real data, both sides could be correct. Recently the Regulatory Studies Center at George Washington University released a publication that looks at the budgets for the US regulatory offices. If we did have a 30 period of deregulation, we would expect the budgets for US regulatory offices to decline, correct? However, what the Regulatory Studies Center report finds is that regulatory budgets increased during this 30 year period. In fact, they not only increased, they skyrocketed. If you doubt this, you can locate this report on their website, located at: http://www.gwu.edu/~regstudies/Home.html. Does this mean that some regulations were removed that ultimately were beneficial? No. However, this does seriously call into question the whole mantra that the past 30 years have been a period of deregulation.

Tuesday, June 1, 2010

You know, as an informed population we would feel insulted if the government of this country attempted to pass a law that violated the law of gravity. Think of the benefits of such a law. We could save millions of gallons of aviation fuel if airplanes did not need to fight against gravity. We would look at these arguments as complete nonsense. Even if such a law was passed, the universe does not care. Gravity would still function and the law would be useless. However, as a population we do not seem to care when our government passes similar laws that violate similar immutable laws, such as the law of supply and demand. Minimum wage laws as such laws. If you raise the price of labor, assuming all else constant, the quantity of labor demanded declines. This is a fact and no law can change this. That is why I find such laws so ridiculous. Mark Perry talks about this in his post on his blog. I would recommend that everyone reads his post on the minimum wage and teenage unemployment.

Thursday, April 15, 2010

I was listening to some podcasts today. In a couple of them, the guests were talking about the concept of spaceship Earth, and using the analogy to explain why we need to conserve Earth's natural resources. However, I think that if we look at this example in a little more detail, we can see why we proboly should not be very worried.

For example, let us suppose that you are stuck on a spaceship that has enough food and water to last one person 3 days in space. Let us also assume that your trip will also take you three days. In this case, you would want to make sure that you conserve your water and food. However, what if you are making a similar trip, but in this ship you have enough food to supply 100 people for a year. Now, the fact that you do only have a limited amount of supplies, enough to last you 100 years, does that mean that you need to be worried about conserving your supplies during your 3 day trip? Not really.

Now, the question is, what ship are we on? Are we on a ship that only has enough resources that we need to make sure that we conserve, or do we have enough so that we don't really have to worry about it. I think there is significant evidence that we live on the ship with an abundant supply of resources, and we really don't need to worry about conserving our resources. To me, these people talking about our need to conserve our natural resources are like people telling the individual with 100 years worth of supplies on a 3 day trip that he needs to make sure that he conserves his supplies, because he only has a limited supply.

Friday, March 26, 2010

I must concede that I am not a particular fan of the health care legislation that was passed recently. Personally, I do not think that it really does anything to address the real problems of health care sector. It make some small attempts to address cost by funding comparative effectiveness research. However, given the controversy surrounding the mammogram research, I don't think that comparative effectiveness research will really have any effect on health care spending. For the most part, the legislation mostly shifts costs around in the hopes of increasing health insurance coverage. For example, the community rating, mandatory issuance and individual mandate only shifts costs from the sick to the healthy. In addition the federal payments to low income individuals health care shifts health care costs from low income people to tax payers (the top 50% of income earners). In fact, these cost shifts hide the market signals that prices provide even further, which I think will make health care costs to rise even faster.

If you read any blogs, you know that everyone is writing on what they think will happen because of the current law changes. I too am fairly confident that I know that is going to happen because of this legislation. In fact I am confident enough to bet on the subject. Here is what I propose: I will make a $100 bet with the first individual that contacts me that the following will occur:

1. Heath care costs will continue to rise faster than overall inflation (using the C-CPI for the United States.

2. Because of this continued rise in the cost of health care, health insurance companies will continued to be blamed for health care costs and new calls will be made for creating a public insurance option before 2020.

3. A public insurance option will be created before, or during, 2020.

This is just a basic set of stipulations. If you are interested in developing this further and setting up a bet, feel free to contact me at: mcnay767@hotmail.com.

Sunday, March 21, 2010

If you read just about any report on sustainable living, or public transportation advocates, you will most defiantly hear the argument that mass transit should be promoted, and subsidized, because it is more cost efficient, relative to automobiles. While I may question the analysis of many of these reports, lets give them the benefit of the doubt on this matter. So, let assume that mass transit is less costly that using private automobiles. Does this mean that there is a market failure, and public action is needed to promote mass transit? Of course not. Lets make an analogy to determine why this is the case. It is less costly to own and operate a bicycle, relative to a motorcycle. In addition, the two serve the same basic purpose. So why do people use motorcycle instead of bicycles. the answer, of course, is the motorcycle provides some benefits that bicycles do not. Speed, comfort, pleasure are all possible benefits. We also know that these benefits must outweigh the added costs that the motorcycle provides. The same holds for personal cars, relative to mass transit. This is one of the many reasons why I feel that many of the arguments for "sustainable living" and mass transit are particularly weak.